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The Problem with Pre-Paid

Posted on Nov 20, 2012

Blog post by: Leilani Doyle

Pre-paid cards have been one of the fastest growing sectors in the payments world. With a growing percentage of under-banked individuals in the US, combined with the greater dependence on cards for all types of online and in-store purchases, pre-paid cards seem like the only answer. However, the overall user experience of obtaining and using pre-paid cards, in particular reloadable pre-paid cards, is far from perfect.

In a recent blog post by Michelle Castell, senior payments risk analyst in the Retail Payment Risk Forum at the Atlanta Fed, relays the numerous steps involved with buying, using and then trying to reload a pre-paid card. Her original goal was to use the pre-paid card as a way of transitioning her teenager to the world of responsible money management. What resulted was a cumbersome process involving having to use cash to buy the card, paying purchase fees and monthly maintenance fees, dealing with requirements to register the identity of the card holder including social security number, and then waiting for the personalized card to arrive. The irony of the whole story was that the card could not be used by anyone under 16, which rendered the reloadable aspect unavailable for my 15 year old teenager, thus further rendering the card useless once the balance falls to zero!

For an employee of the Fed who is familiar with banking products and services, this seemed like a major ordeal. But, for the millions of un-banked or under-banked, it is a reality they have to deal with on a regular basis. When you consider this complex and time consuming process and compare it to what future mobile payments products could offer, pre-paid cards could rapidly be displaced.

In any regard, the blog post is an interesting read, especially if you are considering a pre-paid card as a choice for your teenagers during the holiday shopping season.